Luk Fook to double mainland outlets in five years

Luk Fook Holdings International Ltd. (00590.HK), a Hong Kong-based jewelry retailer, aims to double its sales outlets in mainland China to more than 2,000 within the next five years, tapping rising demand in third and fourth-tier cities.

“We are pressing ahead with an annual 15 percent expansion target, and we don’t see any reason we should restrain ourselves or slow down,” William Wong, chairman and founder of Luk Fook, told the Hong Kong Economic Journal’s EJ Insight in an interview.

The 22-year-old company is now shifting its gravity to expand its presence in inland cities in China, as local households see their incomes rise and develop a fondness for gold jewelry. These smaller cities look set to become the main engine of China’s jewelry market in coming years, according to Wong who got his start in the jewelry industry in the 1980s.

Chinese cities with third-tier status or below will account for more than 40 percent of the country’s total jewelry market by 2015, up from 34 percent in 2010 and 29 percent in 2006, according to data from research firm Frost & Sullivan.

Currently, Luk Fook has a total of 534 sales outlets in these lower-tier cities, including 510 licensed shops and 24 self-operated shops as of Oct.16. This accounts for as much as 47 percent of its total sales points in the country amounting to 1,136, according to company data.

In China, Beijing, Shanghai, Guangzhou and Shenzhen are generally regarded as first-tier cities, while provincial capitals and a few affluent coastal cities are in the second tier. Inland cities in central and western China are considered as third or fourth-tier.

License shops

“We prefer to utilize the approach of licensee shops in third and fourth-tier cities, which would not cost a penny for us on one hand, and boost our revenue in licensing and wholesaling on the other,” Wong said.

The licensing and wholesaling income generated from these license stores contributed over 30 percent or roughly HK$379 million (US$48.88 million) of its net profit in the last fiscal year, according to the company’s annual report. Within several months between July and mid-Oct., it added 184 license stores in these inland cities.

Luk Fook has established a set of criteria for screening potential bidders for their license shops in China.

“The potential candidate has to have at least 7 to 8 million yuan (US$1.15-1.31 million) capital on hand in the first place. Besides, we hope to have someone with a track record in retail business and a good network with local business community,” Wong said.

“Another key point is that if the candidate can secure a prime location in shopping malls,” he added. In Hong Kong, huge street-level jewelry stores are lined up along the main streets in bustling business areas like Causeway Bay, while in the mainland, the stores, which are much smaller, are usually found in shopping malls.

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